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Housing still defined by lack of supply

Looking across a broad range of metrics, including building activity, the mortgage market, and transaction levels, the housing sector is still some way from being described as a ‘normal’ functioning market writes John Fahey Senior Economist at AIB.

Just over three years into the recovery in the Irish residential property market, after prices bottomed in March 2013, the sector continues to be defined by a supply shortfall. This has resulted in sustained upward pressure on prices, which are now up around 35% from their low point. Rents are also rising rapidly. The key issue of insufficient supply is very much evident in the housing completions data.

The data shows that completions totalled just over 12,600 units in 2015, 15% up on 2014. However, it is still well short of the estimated 25,000 units that are required to be built each year in order to meet the underlying demographic demand. Forward looking indicators, such as house guarantee registrations which tend to reflect developer activity, were 58% higher in the 12 months to January, but the actual number has levelled off in the past six months. Meanwhile, commencement notices continue to improve on a 12-month cumulative basis. However, both indicators remain very low in absolute terms. In regard to survey indicators, the housing component of the construction PMI rose to its highest level in February 2016 since the survey began (June 2000). This suggests that the recovery may be gaining some momentum.

Overall, though, while construction activity is showing signs of a pick-up, trends in housing registrations/commencements point to a continuing slow recovery in house building. Indeed, it is likely to be 2018 at the earliest before housing output rises to the required 25,000 units per annum. This imbalance between supply and demand is also highlighted in the latest Daft.ie data on houses available for sale. The most recent data, which are for December 2015, show that there were 25,470 properties listed for sale, a fall of around 14% compared to the same month a year earlier. This represents only around 1% of the total private housing stock.

In a ‘normal’ market, the level of stock for sale should be in the region of 3%-4% as a proportion of total stock. The issue of limited supply/sales stock is also reflected in lending activity in the mortgage market. Added to this, the Central Bank regulations on mortgage lending are also impacting.New mortgage lending amounted to €4.8bn in 2015, up from €3.9bn in 2014, an increase of 23%. However, growth was heavily skewed towards the first half of 2015 and year-on-year growth in mortgage drawdowns actually turned negative in the final quarter of last year.

Looking ahead, the ongoing supply shortage will remain an impediment to transaction levels and, in turn, constrain the extent of growth in the mortgage market. Against the backdrop of a continued shortfall between supply and demand, prices have remained on an upward trajectory.

However, the pace of increase has slowed. The latest CSO data show that, nationally, house prices rose by 8% on a year-on-year basis in February compared to a 14.9% rate of growth in the same month a year earlier.It is clear, from looking at the geographic breakdown of the data, that the slowdown has been due to a sharp deceleration in price growth in Dublin.

Annual price growth slowed to 4% by February versus growth of 21.4% a year earlier. It is no coincidence that this slowdown has occurred at the same time as the introduction of the new Central Bank mortgage regulations, as the average asking price in Dublin is well above the €220,000 LTV threshold. At the same time, growth in non-Dublin house prices has now outpaced Dublin for eight straight months on a year-on-year basis.

The lack of supply and also, more recently, the tighter mortgage lending rules are putting upward pressure on rents, which were up by 8.9% last year. House price growth and rental inflation are likely to continue to experience upward pressure until there is a significant increase in new house building.

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